According to a report by the World Economic Forum, more than 500 million people have access to mobile phones but not to electricity. Today, the emergence of sustainable energy has changed the role played by the private and public sectors in rural electrification.
It is now two decades since the summer issue of Finance & Development, published by the International Monetary Fund (IMF), discussed the problem of rural energy in 1997. The last twenty years have witnessed the creation of the Eurozone, the financial crisis of 2007, the creation of new countries (South Sudan, Kosovo, Montenegro and East Timor), the emergence of China as a global economic power, the emergence of solar and wind power, the rise of the digital economy, and the increase of global population by more than 1.5 billion.
However, access to energy in rural areas remains a daunting challenge in developing countries. According to the World Energy Outlook, 1.2 billion people are without access to electricity, and more than 2.7 billion people rely on biomass for cooking. Around 95 percent of this population is in sub-Saharan Africa and developing Asia. China remarkably achieved 100 percent electrification in 2015, but India is home to the most people without access to electricity.
Ensuring access to affordable, reliable, sustainable and modern energy for all is one of the UN Sustainable Development Goals adopted in 2015. However, efforts to achieve universal energy access predate the formal adoption of global goals. In the last two decades alone, the percentage of global rural population having access to electricity has risen from 62 percent to 72 percent. While this data shows significant progress when accounted for increasing population, it also reveals that 28 percent of the rural population still has no access to electricity. Although China has achieved Universal Energy Access, 33 percent of its population still relies on biomass for cooking. Around 80 percent of the global rural population still uses kerosene lamps for lighting.
Some of the challenges to universal energy access are linked to historical policy issues which continue to cripple energy markets in many developing countries. While expanding the grid to rural areas is among the most economical options to increase access to electricity, such expansion is restricted by financial and operational constraints. Years of subsidized electricity has turned many public utilities into financially burdened entities, hindering their ability to extend services into remote areas. In Sub-Saharan Africa, power companies have experienced substantial hidden costs over the last few decades, which in turn have constrained their ability to expand access. In India, state-owned power distribution companies had accumulated losses of 3.8 trillion rupees by March 2015. However, the emergence of sustainable and affordable off-grid energy solutions has changed the role that the private and public sectors can together play to achieve universal energy access.
Promoting Clean Energy Mini-Grids in Rural Areas
The unelectrified rural population, with a per capita income of less than $3 a day, spends $37 billion per year on basic energy needs. This often constitutes more than 10 percent of the monthly budget of such households. The private sector is yet to tap this large consumer base.
According to a report by the World Economic Forum, more than 500 million people have access to mobile phones but not to electricity. But unlike the telecom industry, the flow of private capital for rural electrification has been very limited. As the business viability for off-grid clean energy gains traction, the role of private capital is likely to change. In 2016 alone, 161 GW of renewable energy capacity was added globally with investments of around $241 billion, largely involving private capital.
Building viable business models is a prerequisite for developing clean energy solutions. For simple economic reasons, the tariff that can be charged to rural households should be comparable to the cost of kerosene used for lighting. In India, the cost of generation in a rural solar mini-grid is five to eight times higher than the cost of generation in a utility-scale solar plant. In such a scenario, charging customers for per unit consumption is not viable, and hence, monthly fixed cost pricing is often used along with supply of energy-efficient light bulbs.
The telecom towers in rural areas rely on diesel powered generators and present yet another opportunity for the transition to sustainable energy. The addition of reliable loads, such as telecom towers, increases the commercial feasibility of mini-grids serving households and micro-enterprises.
With decreasing cost of solar modules and batteries, the cost of solar mini-grids will decrease, thereby further increasing their commercial viability. The cost of solar cells fell by more than 60 percent between 2009 and 2013. That cost may continue to fall till 2025 and beyond. Solar home systems have also gained traction in rural markets, which can be facilitated through financing and capacity building of local energy services companies to offer lease or fee-for-service solutions to rural customers who cannot afford upfront payment. For instance, microfinance institutions in partnership with international development agencies have facilitated the development of solar devices in countries such as India and Tanzania.
On their part, policymakers should adopt a market-development approach instead of market-distorting approaches, by using public finance to leverage private capital and by framing policies that incentivize positive market action. There is, for instance, a need to outline a clear roadmap on the interaction of private mini-grids with the national grid, when the latter reaches the currently unserved areas. Policy must determine whether private mini-grids may continue to operate in parallel to the national grid, sell their entire generation directly to the grid, or be taken over by the grid. Each of these scenarios requires policy articulation to mitigate risks.
Another area which requires policy action is the design of subsidy programs. The International Energy Agency (IEA) estimates global fossil fuel subsidies at $493 billion. Another recent report estimated global fossil fuel subsidies to be $5.3 trillion in 2015, when accounted for environmental costs and general consumption taxes. A significant amount of public resources can be freed up by redesigning subsidy programs. An IMF survey outlined six key elements for subsidy reforms, ranging from phased price increases to targeted measures to protect the poor. In Kenya, phased subsidy reform caused electricity subsidies to fall from 1.5 percent of GDP in 2001 to zero in 2008.
To achieve universal energy access by 2030, more than $1.5 trillion of investment is required to expand access to modern energy services, including for electricity and clean cooking. Clearly, any such spending will have to compete with other public programs for scarce financial resources. A combination of impact capital, international aid, public funding and private finance will be needed.
Achieving universal energy access by 2030 is possible. Sustainable energy provides a pathway. The combined efforts of different stakeholders and the effective implementation of strategies are keys to tackling the rural energy challenge. The concerted efforts of private sector, governments, local and international institutions can yield stellar results.
Arsalan Ali Farooquee is an investment professional with a keen interest in sustainable finance. He has worked on renewable energy, designed innovative financing initiatives and has advised public agencies on energy policy. His writings have been featured in Elsevier and Institutional Investor Journals. He can be reached at [email protected]